Auto loans research

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Contents

AUTO LOANS - RESEARCH[edit]

Who is Squeezing Me?[edit]

Lenders[edit]

Financiers[edit]

Private Equity[edit]

Regulators[edit]

Politicians / Lobbyists[edit]


What Can I do about it?[edit]

Potential Organizing / Actions[edit]

Pressure Points[edit]

  • Private Equity Involvement
  • Securitization @ Originators? Is there a way to single out/target subprime?
  • BHPH % of securitizations?
  • Loans at Lender stage - i.e. organize borrowers
  • Subprime (or deep subprime, BHPH focus)

Timeline / Visualization[edit]

Market Overview[edit]

Loan Market[edit]

  • Subprime Loans often made by non-bank finance companies
  • Since 2009 lending to subprime consumers has more than doubled, while lending to prime consumers has only increased by about half. Overall, new auto loan originations are at volumes not seen since 2005. [1]
  • Wells Fargo decided in 2015 to limit its subprime auto lending to 10 percent of the car loans it makes, the New York Times reported. [2] .
  • JPMorgan's Gordon Smith earlier this year said the bank started cutting its subprime auto lending in 2013. In 2016 it looked at its some of its auto loan exposure again, and cut further. [3]
  • NYFed 2016Q4 Household Debt: There were $142 billion in auto loan originations in the fourth quarter, making 2016 the highest auto loan origination year in the 18-year history of the data [4]
  • Auto loan balances increased by $22 billion, continuing their steady rise. Auto loan delinquency rates deteriorated again, with 3.8% of auto loan balances 90 or more days delinquent on December 31, 0.2% above last quarter.
  • According to data compiled by the St. Louis Federal Reserve Bank,total auto loans hit $1.1 trillion in the second quarter of 2016 - a new high, and substantially above the $800 billion peak that occurred prior to the 2008 financial crisis. [5]
  • Borrowers are Gaming their Credit Scores [6]
  • PE Investment in Lenders: In July of 2014, we noted that industry participants were facing heightened competition and that some sophisticated investors (e.g., major private equity firms, such as Warburg Pincus and KKR) were exiting their investments in below-prime auto finance firms, perhaps signaling a valuation peak. [7]
  • Lending Breakdown: Banks 35%, Credit Unions 16%, Captive Finance 42%

Major Lenders:[edit]

% IMAGE - P.9 %

Source: [8]

Big Banks[edit]
  • Ally
  • Capital One
  • JPMorgan
  • Santander Consumer
Independent Lenders[edit]
  • Exeter Finance (Specializes in Subprime)(Owned by Blackstone!)
  • Skopos (Specializes in Subprime)
  • DriveTime
  • Flagship Credit Acceptance
  • Westlake Financial Services
Captive Financing Arms at Auto Companies[edit]
  • GM Financial's AmeriCredit

Buy Here Pay Here[edit]

  • 2011 LA Times Investigation on Buy Here Pay Here [9]
  • Buy Here Pay Here lots sold nearly 2.4 million cars nationwide last year, up from 1.3 million a decade ago, according to CNW Marketing Research.
  • CNW estimates that there are more than 33,000 such lots nationwide, compared with about 20,000 dealerships selling new cars.
  • Buy Here Pay Here dealers make $80 billion in loans every year, according to the Federal Deposit Insurance Corp.
  • Many of the lots require customers to return once or twice a month to make loan payments in cash - hence the term Buy Here Pay Here.
  • Many dealers don't worry about buyers' credit scores - knowing they can't be good - but they almost always insist on long lists of references so they can pressure friends and family when a payment is missed.
  • They also frequently help customers apply for the earned income tax credit for low-income workers - and then offer a loan against the anticipated refund to use as a down payment.
  • When the customer defaults, it's common for the dealer to repossess the car, declare a loss for tax purposes, and put the vehicle up for sale again.
  • In addition to private equity firms such as Altamont, KKR, Warburg Pincus, several payday lending chains are moving into Buy Here Pay Here and have acquired dealerships.
  • Some Buy Here Pay Here chains securitize their loan portfolios themselves. DriveTime Automotive Group in Phoenix, a chain of 88 dealerships in 17 states has issued two offerings of bundled car loans this year totaling $461 million. [10]

Bond Market And Securitizations[edit]

Major Underwriters/Issuers:[edit]

  • Santander Consumer and GM Financial's AmeriCredit are the two largest issuers of bonds backed by subprime auto loans
  • JPM and Wells Fargo also top issuers
  • About a third of the risky car loans that are bundled into bonds are considered "deep subprime" a level that has surged since 2010 and is translating to higher delinquencies on the loans, according to Morgan Stanley. - risen to 32.5 percent from 5.1 percent since 2010. [11]
  • At least two dozen lenders have tapped the debt market to sell bonds that hold their subprime auto loans over the last few years. They include smaller lenders like Sierra Auto Finance, Skopos Financial and GO Financial. A high percentage of loans bundled into bonds were made to borrowers with no credit score [12] at all.

Top SubPrime Underwriters 2016 : [13]

  • Wells (24% Market Share)
  • JPM (16% Market Share)
  • Citi
  • DB
  • Barclays
  • BNP
  • BofA consciously stays out of subprime auto underwriting due to reputational risk
  • $192.3 billion of securities backed by auto loans [70bn Prime, 42mm Subprime] [14] including leases, RVs, other auto financing, outstanding at the end of March according to the Securities Industry and Financial Markets Association, compared with around $8.9 trillion of residential mortgage bonds at the end of last year. [15]
  • Issuance around $65bn per year [16]
  • Subprime issuance 7bn 1Q2017
  • The risk premiums, or spreads, that money managers demand for three-year top-rated subprime auto bonds was just 0.27 percentage point in mid-March compared with benchmark swap rates, down from 0.95 percentage point a year earlier, around the tightest since the financial crisis.
  • SIFMA 1H2017 Issuance: [17]

Major Bondholders[edit]

  • The buyers are usually insurance companies, banks, mutual funds and other institutional investors. [18]
  • OppenheimerFunds, which has more than $188 billion in assets and 11 million shareholders, holds DriveTime securities in at least six of its mutual funds, company reports show. (2011) [19]
  • Some Hedge Funds going Short : Etai Friedman, who runs hedge fund Crestwood Advisors LLC and manages $250-million, said he was able to work with a salesman he had known for years to buy an option that performed well if a custom-made index of subprime auto bonds fell. Mr. Friedman declined to identify the bank that did the trade, on which he earned a 36-per-cent return, but said finding a dealer was hard. [20]
  • In the subprime mortgage crisis, there were credit derivatives that investors could use to bet against an index of bonds backed by the home loans, but no such derivatives exist now for bonds backed by auto loans. [21]
  • BUT… Blackrock issuing Auto Loan-backed ETFs (you could potentially use these to short the market): [22]

Market Performance[edit]

  • Delinquencies among lower-rated borrowers have risen to the highest level since 2009 [23]
  • The proportion of soured car loans showed a 13 per cent increase to 1.44 per cent in 2016 (same with Credit Card delinquencies)
  • The car loan delinquency rate also remains lower than for other types of debt. Americans continue to prioritise car loan repayments - a sign of the importance they attach to their vehicles.
  • The mortgage delinquency rate is significantly higher than the car loans rate, at 2.28 per cent, although this remains low by the historical standards of the home loan market.
  • The average borrower has about $18,400 in debt on their car loan - up about a tenth from three years ago. [24]
  • The amount of auto loans outstanding is growing at the fastest pace on record and now accounts for a bigger proportion of total US household liabilities in at least 14 years. [25] [26]
  • Auto loans now make up 9.2 percent of Americans' debt loads,
  • Substantial Fraud (particularly in Santander's issues) - no income verification, inflated values [27]
  • Profits down, especially in subprime
  • Banks are increasing securitizations while reducing outright loans (reminiscent of pre-crash mortgage activity) [28]
  • delinquencies and losses are expected to only get worse.
  • There has never been a principal loss of any publicly issued subprime auto ABS, according to our research. Since the early 1990s, only two private placements with initial non-IG ratings defaulted. The financial crisis produced numerous downgrades; mostly from surety downgrades. Significant up-front enhancement and deleveraging protects the structure. (From 2014 - likely still true.)
  • The auto ABS securitization rate [29] varied from 15-28% from 2004-present. Currently at 16%, it shows that most US auto loans are held on lenders' balance sheet.
  • Fed Notes particular deterioration in subprime: [30]
  • Some interesting charts on Santander issuances: [31]
  • In a remarkable development, consumers with lower credit scores are receiving longer loan terms than prime borrowers. This is undoubtedly due to the effort to create an affordable payment for consumers that may not have sufficient disposable income
  • S&P Analysis Quarterly: [32]
  • There has been significant consolidation amongst subprime lenders, partially exacerbated by PE money coming in.

Charts source: [33]


Political Overview[edit]

  • Auto dealers, who tend to be prominent constituents in most congressional districts, lobbied successfully to be exempted from regulation by the bureau. That special treatment has meant relatively weak oversight of auto lending, because many auto loans, though financed by regulated lenders, are arranged by dealers, who often have discretion over most loan terms.
  • How do Auto Dealers wield such power? The National Auto Dealers Association, the main trade group for the industry, has delivered over $35million to members of Congress since 2002, while averaging roughly $3 million a year in lobbying expenses since 2008. And individual dealers are also generous in the election cycle; their $7 million in contributions in the 2014 election cycle went to an amazing 372 out of the 435 House members, and 57 out of the 100 senators. [34] [35]

Elected Officials[edit]

  • Yeas/Nays on Discrimination House Bill: [36]

Most Supportive:[edit]

  • Rep. Gwen Moore (D-Wis.) has tried for years to get the government to help the poor buy cars. In 2005 and again in 2007, she sponsored legislation to provide $50 million a year for low-income car ownership programs. Both bills died in committee. She said she has faced resistance from, among others, environmental organizations that insist mass transit is a better solution. [37]
  • CA Assemblyman Roger Hernández (D-West Covina):In many states, welfare laws limit what aid recipients can spend on cars. In California, they can't own a car worth more than $4,650, a dollar value set in the mid-'90s. Gov. Jerry Brown vetoed a bill to lift the cap, citing concern over its potential effect on the state budget. The bill's author, Assemblyman Roger Hernández (D-West Covina), said the veto was misguided. [38] [39] [40]
  • The auto dealers succeeded by "leveraging their personal relationships and influence with members," Rep. Maxine Waters, D-Calif., ranking member of the House Financial Services Committee, told The Intercept. She voted no. [41]


Least Supportive:[edit]

  • CA Governor Jerry Brown: In many states, welfare laws limit what aid recipients can spend on cars. In California, they can't own a car worth more than $4,650, a dollar value set in the mid-'90s. Gov. Jerry Brown vetoed a bill to lift the cap, citing concern over its potential effect on the state budget. The bill's author, Assemblyman Roger Hernández (D-West Covina), said the veto was misguided. [42] [43] [44]
  • NJ Governor Chris Christie: The New Jersey Legislature is working to revise a bill, vetoed this month by Gov. Chris Christie, that would strengthen the disclosure requirements and add consumer protections to the [kill switch] devices. Under the bill, consumers would get written disclosures that a device had been installed in their car and at least 72 hours' notice before the ignition was disabled. [45]
  • Rep. John Campbell (R-Calif.), a former Orange County Saab dealer, proposed the amendment to Dodd-Frank that would exclude auto dealers-his former colleagues-from CFPB oversight [46] [47]
  • The Industry also has its own mini-caucus. Seven current Republican House members (including two freshmen) either run dealerships or managed them before coming to Washington. Yet another, John Campbell of California, retired in 2014 - but not before authoring the carve-out that shielded dealers from CFPB oversight. Campbell was actually collecting millions of dollars in rent from dealers on his former properties when he authored the legislation. Senior Democrats, not wanting to defy auto dealers, famously changed their votes when it became clear that the carve-out would be victorious. (2011). [48] [49] [50] [51]

Incumbents include:

  • Vern Buchanan of Florida,
  • John Campbell of California (retired)
  • Bill Shuster of Pennsylvania.

Freshmen members:

  • Mike Kelly of Pennsylvania,
  • Scott Rigell of Virginia
  • Jim Renacci from Ohio.

No members of the U.S. Senate are current or former car dealers. (2011)

Organizing Landscape[edit]

Ideology:[edit]

Policy Arguments/Rationale In Support:[edit]

Policy Arguments/Rationale Against:[edit]

Potential Alternatives:[edit]

  • PUBLIC INVESTMENT IN PUBLIC TRANSIT INFRASTRUCTURE [52]
  • Organizing guide for transit riders: [53]
  • "The justification of government support of rural transit on the basis of the presence of increasing returns to scale and the most efficient regional organization of transit is investigated. Returns to density, size, and scope at most levels of output were found. Cost subadditivity, where a monopoly firm can provide service at a lower cost than two firms, was found for many, but not all observations. The presence of natural monopoly in rural transit in a strict sense is rejected. The findings and implications are directly applicable to rural transit in North Dakota and should be helpful in informing future federal policy as well as rural transit policy, service design, and operation in other states." [54]

Non-Predatory (non-profit) lenders, or charitable cars for low incomes:

  • Working Cars for Working Families [55]
  • Angie's Angel Help Network [56]
  • AECF [57]
  • Social Capital Funds (yuck): [58]

Existing Groups/Organizations:[edit]

  • About 160 nonprofit groups nationwide focus on providing affordable used cars to needy families. None is in Southern California, although some churches and other nonprofits provide used cars as part of broader charitable efforts. [59] [60]
  • The dedicated used-car programs work in different ways. Some receive donated vehicles. Others buy cars at auction, using private donations or public funds. Recipients are given cars outright or are allowed to purchase them with reduced-rate loans.
  • JumpStart Auto operates a not-for-profit used-car lot [61] serving rural communities in western Wisconsin. It gives qualified buyers up to $1,000 for a down payment and arranges low-interest loans for the balance. Over the last decade, the program has sold cars to 340 people.

Existing Resources:[edit]

  • CFPB Submit a Complaint Site: [62]
  • For more on odometer fraud check out the DOJ website [63] or this law firm's site [64] on how to cope.

Resistance/Management Tactics:[edit]

  • Kill Switches: : Feb 2017: Dallas-based Santander Consumer USA Holdings Inc., one of the country's biggest subprime auto lenders, has decided not to use GPS-tracking and ignition kill switch technology as regulators clamp down on the devices, an executive said. [65]
  • The Debt Collective's guide to resisting reposession [66]
  • Bypassing Kill Switches: Controversial repossession tactics, including the use of technology to track risky borrowers and even turn off the ignitions of defaulted drivers. Some drivers take matters into their own hands. Homemade videos on the Internet teach borrowers how to disable their devices, and Spireon has started selling lenders a fake GPS device called the Decoy, which is meant to trick borrowers into thinking they have removed the actual tracking system, which is installed along with the Decoy. That trick came in handy when he returned from seeing a movie with a date, only to find his car would not start and the payment reminder was screaming like a burglar alarm. While his date turned the ignition switch, Mr. Fabela used a screwdriver to rig the starter, allowing him to bypass the starter interruption device. [67]

- under investigation by the FTC. [68] - Somewhere between 35 and 70 percent of cars financed with subprime loans may have one of these gadgets installed -Major seller of the devices is called PassTime

Legal Regulatory Landscape[edit]

Existing Regulators[edit]

Source: NCLC Webinar on Dodd-Frank Auto Regulations [69]

  • Thanks to an amendment to the Dodd-Frank financial overhaul, the vast majority of dealers are not overseen by the Consumer Financial Protection Bureau. Since its start in 2010, the agency has earned a reputation for aggressively penalizing lenders, but it has limited authority over dealers. [70]
  • 2010 Congress formed the Consumer Financial Protection Bureau under the Dodd-Frank law and gave the government the power, for the first time, to federally regulate lending by nonbanks, including the carmakers' finance firms.
  • The Federal Trade Commission, the agency that does oversee the dealers, has cracked down on certain questionable practices. And although the agency has won a number of cases against dealers for failing to accurately disclose car costs and other abuses, it has not taken aim at them for falsifying borrowers' incomes, for example.
  • On June 10, 2015, the Consumer Financial Protection Bureau (CFPB or the Bureau) published a rule that will allow the agency to supervise any non-bank auto finance company that makes, acquires or refinances 10,000 or more loans or leases in a year. Under the rule, those companies will be considered "larger participants," and the CFPB may oversee their activity to ensure they are complying with federal consumer financial laws, including the Equal Credit Opportunity Act, the Truth in Lending Act, the Consumer Leasing Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act's prohibition on unfair, deceptive or abusive acts or practices. Previously, the Bureau limited its oversight to auto financing that was being conducted at the largest banks and credit unions. Under the new rule, the CFPB estimates that it will have authority to supervise about 34 of the largest non-bank auto finance companies and their affiliated companies that engage in auto financing. These companies together originate approximately 90% of non-bank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.
  • CFPB's site outlining auto loans: [71]
  • Likely your car has a warranty (most states and the federal government require it), which usually covers lying about or covering up the past of the car, messing with the odometer, and/or misrepresenting the make or model of the car.

Current Regs And Laws:[edit]

CFPB Regulations:[edit]

  • Auto Finance Examination Procedures: [72]
  • Handy guide for dealers to prepare for regulatory scrutiny: Webinar913.pdf

FTC Regulations:[edit]

  • FTC Overview Doc: [73]
  • Privacy Rules: Auto dealers that extend credit, arrange financing or leasing, or give financial advice must notify customers about the information they collect, who they share it with, and how they protect it. [74]

SEC Regulations (Securitizations):[edit]

  • Most Auto Loan Securitizations are covered under Reg AB - the Asset Backed Securities regulation. Big focus on disclosure requirements and some investor protections (typical SEC). [75] [76]
  • As of November 2016 Auto ABS issuers will need to comply with additional requirements under Reg AB II, a US Securities and Exchange Commission disclosure rule - Reg AB II mandates loan-level disclosure about securitized pools - The added disclosures will enhance transparency and reporting requirements of auto ABS.

Current Federal Laws:[edit]

  • FDCPA (Fair Debt Collection Practices Act): Exemption in the FDCPA for Dealers: When Congress enacted the Fair Debt Collection Practices Act in 1977, it imposed strict regulations on firms that collected other companies' debts. But it did not address the activities of businesses like banks, credit card companies and car dealerships that collect their own debts.
  • ECOA (Equal Credit Opportunity Act): The Equal Credit Opportunity Act (Ecoa) Prohibits Discrimination In Consumer Lending By Race Or Gender Or Other Protected Classes. It Does Not Prohibit Discriminating Against Poor People Though. That Always Seems To Be Legal.
  • TILA (Truth In Lending Act): The Truth In Lending Act (Tila) Is A Big Bill That Requires Lenders To Disclose Certain Facts About Loans, Creates A Standard Way To Calculate Interest Rates, And Regulates Other Aspects Of The Lending System.
  • FTCA (Federal Trade Commission Act): The Federal Trade Commission Act (Ftca) Contains A Provision Prohibiting "Unfair And Deceptive Acts And Practices" (Commonly Called "Udap" Or "Consumer Fraud"). This Is The Baseline Protection Against Creditors Misleading You Or Engaging In Other Shady Behavior.
  • CFPA (Consumer Financial Protection Act: The Consumer Financial Protection Act (Cfpa) Added Protections To The Ftca.
  • Bankruptcy: Bankruptcy Laws Are Federal Laws.

"Auto lenders were perhaps the biggest winners of the 2005 Bankruptcy Reform. Cars depreciate quickly, so borrowers often owe more than their car is worth. Prior to the Reform, these borrowers could reduce the principal on their auto loan to the market value of the car through a "cramdown" in Chapter 13 bankruptcy. The Reform prohibited cramdowns during the first two and a half years of an auto loan. This paper is the first to estimate the causal effect of this anti-cramdown provision on the price and quantity of auto credit. [77]

  • Consumer Leasing Act: Requires the leasing company, or lessor (a dealership, for example), to disclose certain information before a lease is signed. That includes the amount due at lease signing or delivery; the number and amounts of monthly payments; all fees charged, including license fees and taxes; the charges for default or late payments; whether the lease can be ended early; whether the leased vehicle can be bought at the end of the lease; the price to buy at the end of the lease; and any extra payments that may be required at the end of the lease. The lessor also must disclose the annual mileage allowance and charges for excessive mileage.
  • Credit Practices Rule: Requires creditors to provide a written notice to potential co-signers about their liability if the other person fails to pay; prohibits late charges in some situations; and prohibits creditors from using certain contract provisions that the government has found to be unfair to consumers.
  • Fair Credit Reporting Act (FCRA): gives consumers many rights, including the right to one free credit report each year from each of the three nationwide consumer reporting agencies. It allows consumers to call one number to notify credit reporting agencies of identity theft. It also provides a process for consumers to dispute information in their credit reports that they believe is inaccurate or incomplete. It requires creditors to give consumers their credit reports and credit scores if a creditor used a credit score in denying them credit or taking other adverse action against them; and it requires creditors to provide consumers with their credit scores and related information in certain other circumstances.
  • Risk-Based Pricing Rule: gives most consumers information about their credit scores when they apply for financing. Most creditors comply with the rule by providing consumers who apply for vehicle financing with a Credit Score Disclosure Notice. This notice contains a consumer's credit score and additional information to put the score in context (for example, it indicates how the credit score compares to the credit scores of other consumers).

Current State Laws:[edit]

  • In many states, welfare laws limit what aid recipients can spend on cars. In California, they can't own a car worth more than $4,650, a dollar value set in the mid-'90s. Gov. Jerry Brown vetoed a bill [78] to lift the cap, citing concern over its potential effect on the state budget. [79] [80],
  • Many states have outlawed yo-yo sales - where sales are conditional on re-selling your loan. Often dealers re-posses the cars citing this clause, and don't return your down payment.

There is a right to cure loans in:

  • California
  • Colorado
  • Connecticut
  • Iowa
  • Kansas
  • Maine
  • Massachusetts
  • Missouri
  • Nebraska
  • New Hampshire
  • Puerto Rico
  • Rhode Island
  • South Carolina
  • South Dakota
  • Virginia
  • Washington, DC
  • West Virginia
  • Wisconsin

There is a right to cure leases in:

  • Connecticut
  • Illinois
  • Indiana
  • Kansas
  • Maine
  • New Hampshire
  • New Jersey
  • New York
  • Rhode Island
  • Washington, DC
  • West Virginia
  • Wisconsin
  • In other states, you may also have a right to cure written in your sales agreement (check!). Even without a clear right, creditors might be willing to allow you to cure.
  • Curing a default means paying back arrears plus penalties fees and costs. It does not mean paying back the whole loan. [81]

Creditors are not allowed to:

  • Trespass on your property
  • Use or threaten force
  • Break into your house or garage
  • Impersonate police officers
  • Do any other otherwise illegal action

Generally, they are not allowed to "breach the peace" in order to get to the car. So you can put your or your friend's or family's body in their way. You should make sure to question anybody presenting themselves as a police officer, although once they show ID it would be illegal to stop them. Creditors know that the hardest way to get to a car is through you, so they often sneak to get a car at night. That is legal.

  • If you are on active military duty, you have special rights as long as you were current on payments before you left. You have a right to lower interest rates and your car cannot be repossessed while you're on duty. To find somebody who can help with this law see [82]

Some state laws do make it illegal to discriminate against covered persons based on active duty or veteran/military status. These states include:

Enforcement:[edit]

  • CFPB and DOJ Order Ally to Pay $80 Million to Consumers Harmed by Discriminatory Auto Loan Pricing [88]

Proposed Laws And Regs:[edit]

  • NCLC Model Amendments for Reposessions: [89]
  • Rep. Gwen Moore (D-Wis.) has tried for years to get the government to help the poor buy cars. In 2005 and again in 2007, she sponsored legislation [90] to provide $50 million a year for low-income car ownership programs. Both bills died in committee. She said she has faced resistance from, among others, environmental organizations that insist mass transit is a better solution.
  • In many states [91], welfare laws limit what aid recipients can spend on cars. In California, they can't own a car worth more than $4,650, a dollar value set in the mid-'90s. Gov. Jerry Brown [92] vetoed [93] a bill [94] to lift the cap, citing concern over its potential effect on the state budget. The bill's author, Assemblyman Roger Hernández (D-West Covina), said the veto was misguided.
  • NJ has proposed a bill that would require consumers to get written disclosure that a kill switch has been installed in their car and 72 hours' advance notice before the ignition is disabled. State laws [95] governing repossession typically prevent lenders from seizing cars until the borrowers are in default, which often means that they have not made their payments for at least 30 days. The devices, lawyers for borrowers argue, violate those laws because they may effectively repossess the car only days after a missed payment.

Investigations[edit]

Underwriting and Securitization Practices:

  • The U.S. Justice Department opened an industrywide investigation in 2014 into lenders and their underwriting and securitization processes. A top official said Justice was looking at potential parallels with lending abuses seen in the run-up to the mortgage crisis. [96]
  • State regulators initiated their own investigations into abuses at local dealerships and their relationships with finance companies that buy the loans.

Kill Switches (and Reposession Practices):

  • Controversial repossession tactics, including the use of technology to track risky borrowers and even turn off the ignitions of defaulted drivers, are some practices under investigation by the FTC. [97]
  • Somewhere between 35 and 70 percent of cars financed with subprime loans may have one of these gadgets installed. Major seller of the devices is called PassTime
  • Specifically looking at two lenders: Credit Acceptance Corp. and DriveTime Automotive Group Inc., [98]
  • Credit Acceptance has received at least five subpoenas or regulatory demands for information since December 2014, including one from Maryland's attorney general requesting information about its repossession policies, the documents obtained by Bloomberg show. [99]

Collection Practices:

  • Auto finance companies have been censured in the past for lower-tech forms of violating collections laws. In 2014, the FTC settled with Consumer Portfolio Services for $5.5 million over allegations that it was harassing and threatening delinquent customers, illegally telling struggling borrowers that, "the tow truck is around the corner," or, "we're coming to get your car," even when repossessions weren't imminent or likely, the FTC's complaint said . CPS neither admitted nor denied the allegations in the complaint. [100] [101]

Interest Rate Markups:

  • Ally Financial Inc. received a subpoena from the Securities and Exchange Commission while Capital One, in November 2015, disclosed that it received a subpoena from the New York District Attorney's Office.

Discrimination:

  • JPMorgan Chase & Co. disclosed in 2015 that it is in discussions with the department about potential disparities in markups charged to different races and ethnicities in auto loans originated by dealers and purchased by the bank. Toyota Motor Credit Corp., a financing arm of Japan's Toyota Motor Corp., and American Honda Finance Corp., a unit of Honda Motor Co. Ltd, also disclosed federal probes. [102]

FAQs:[edit]

My car has been repossessed, and I was told it will be sold. What can I do? [103]

  • Your rights after repossession vary depending on your state law. In some states there are laws granting a right to reinstate after repossession. These laws usually provide for a time period after repossession in which you can get your vehicle back by making up any existing overdue payments and the cost of repossession.
  • If you don't reinstate the loan or you live in a state where there is not a right to reinstate, your lender can either keep the vehicle as compensation for your debt or sell it at a private or public sale. For a public sale the lender must notify you of the date, time, and place of the sale so you can have a chance to bid on the vehicle. For a private sale the lender must notify you of the time after which the vehicle may be sold. In either a public or private sale, you may be entitled to buy back the vehicle by paying the full loan amount plus the repossession costs before the sale.
  • Deficiency balance. If your vehicle is repossessed and sold, you may be responsible for paying the difference between the amount left on your loan (plus repossession fees) and the sale price. This is known as a "deficiency balance". For example, if you owe $10,000 on the vehicle and your creditor sells it in a commercially reasonable manner and gets $7,500, then the deficiency is $2,500 plus any other fees you owe. If you don't pay the deficiency, the lender may hire a debt collector to attempt to collect the debt. The lender may also file a lawsuit in court against you to collect the deficiency. If the lender obtains a judgment from the court, the lender can garnish your wages and take other steps to collect the judgment. If there is a surplus of funds after your lender has applied the sale proceeds to your balance then you are entitled to those funds. You should make sure you know what the vehicle sold for and consult an attorney if you think the price was unreasonable.
  • Repossession costs. You will likely be charged for the cost of repossession. However, the fees for repossession must be reasonable. Reasonableness is ultimately determined by a court and will depend on the type of vehicle taken, how it was taken, and where it was taken. You should ask your lender for an accounting of the repossession costs.
  • You may have other rights and obligations under your state law. You may be able to get more information about your state law from your state AG [104], consulting with a private attorney [105]


What happens if I left some of my personal possessions in my vehicle when it was repossessed? [106]

  • Your rights vary depending on your state, but most states require repossessing companies to make any of your possessions left in the vehicle available to you.
  • You will have to go get them at a time that is convenient to the repossessing company. It is important to document what items you left in the vehicle and their estimated value. If your vehicle has been repossessed and you left property in your vehicle, contact your lender immediately to arrange to get your belongings. If the lender or repossessing company is demanding payment for return of your property, you should consult an attorney. You could also file a complaint with your state AG or state regulator.


If I can't make my auto loan payments, will my vehicle be repossessed? [107]

  • If you are late on your payments, a lender may repossess your vehicle. Your credit will be affected, you may still owe on any unpaid balance [108] on the auto loan, and you will be responsible for repossession costs.
  • To try to avoid the repossession:
  • Contact your lender as soon as possible. Your lender may be willing to work with you to come up with an affordable payment plan, especially if you have made timely payments in the past. If you do reach an agreement, get it in writing so there isn't a dispute later.
  • Refinance. You may be able to get a lower interest rate or spread out the payments over more time. Generally, a longer term loan means you will pay more in interest. [109] [110].
  • Sell your vehicle. Figure out how much you owe on the auto loan and then check the approximate market value of your vehicle. If you owe less than the value of the vehicle, you can sell it and use the proceeds to pay off the loan. Check your auto loan contract to see if you have a prepayment penalty for paying off early.
  • If you do not pay, a lender can repossess your vehicle. In many states, as soon as you've missed a payment on the vehicle, your lender has the right to take back or repossess the vehicle without warning you or getting a court order. Some states have laws that require a notice before repossession, alerting you to what payments have been missed, while also providing a short time period in which you can make up payments to prevent repossession.
  • Lender may not "breach the peace" in repossessing. Under state law, a lender may not repossess a vehicle unless it can do so without a breach of peace. The definition of breach of the peace varies depending on your state law. Typically, it includes things like threatening or using physical force, removing a vehicle from a closed garage without permission, or continuing with repossession after you have resisted or refused to allow the repossession. If the lender commits a breach of the peace, you may contact law enforcement. A breach of the peace may also give you a claim for damages or a defense which may lessen the amount you eventually owe after the sale of the vehicle.
  • Repossession methods. Besides physically removing the vehicle, some lenders may also use a starter interrupt device (SID) in place of repossession or to help facilitate repossession. A SID is a device that allows a lender or lessor to remotely deactivate a vehicle's ignition system if a borrower/lessee misses payments or defaults. The shut-down can be temporary, until a payment is made, or it can be done to make repossession easier. The rules on SIDs vary from state to state so ask your lender before signing the contract if your vehicle is equipped with a SID. If it is, you should ask how this process will work - for example, will you get any warning before the vehicle is shut down? Is there a way for the vehicle to be restarted in case of an emergency?


I am getting collection calls. What can I do? [111]

  • You should first determine whether you really are late on your payments. Check your bank account information to make sure your payments were withdrawn. You should also make sure that your payment was either mailed or sent electronically to the right place by contacting your lender or servicer directly.
  • If you aren't late or you disagree with the amount the debt collector says is due, you can dispute the collection claim. Even if you are late, remember that you have rights when dealing with debt collectors, and it is against the law for a collector to harass you or make false statements to you.


What happens to my credit report if I am late making payments on my auto loan or my car is repossessed? [112]

  • If you are late making your auto loan payments this will likely show up on your credit report and may affect your ability to obtain other credit. Repossessions, for instance, can stay on your credit report for seven years.


What if the lender offers to just take the vehicle back and forgive the loan? Will it affect my credit report? [113]

  • You must get the lender to state in writing that returning the vehicle fully satisfies your loan; otherwise, you may still be liable on the loan and for any deficiency.
  • Additionally, you must ask the lender to confirm in writing that it will not report your return of the vehicle to the credit reporting agencies as a "repossession." Get a full release from the lender if you turn over the vehicle and the keys voluntarily. Unless you take these steps, your returning the vehicle and turning in the keys does not stop the lender from claiming that you owe more money on your auto loan. A loan delinquency and a repossession will stay on your credit report for seven years from the date of the delinquency or repossession.


What should I do if I have problems making my auto loan payments? [114]

  • If you are having problems making payments, contact your lender or loan servicer and ask what options are available to you. You can try to work out a payment plan. If you do, confirm any payment plan in writing. Also, be sure to ask about any negative impact that a workout plan might have on your credit report. If you are told there will not be any negative impact if you select one of the options you are offered, ask for confirmation in writing. If you have trouble making your auto loan payment, the sooner you contact the lender the better chance you have of working out an arrangement that gives you time to get back on track.


Can I prepay my loan at any time without penalty? [115]

  • Whether you can pay off your auto loan early without a penalty depends on your contract and on your state's law. If the lender wants to charge you a penalty or fee to pay off the loan early, the contract has to contain a prepayment penalty clause. Review your Truth in Lending disclosures and the contract before you sign the agreement. These documents will tell you whether there is a penalty for paying early. You should also ask your lender, or the dealer if you are getting dealer-financing, if there is a prepayment penalty. If there is, you can negotiate to have the penalty removed from the contract or ask for a different loan. If your loan has a high interest rate, you may later be able to refinance at a lower interest rate and payment. When you refinance, you prepay the original loan in full. Ask your bank, credit union, or other lender about interest rates.


How do I know who my auto loan lender or servicer is? [116]

  • If you financed your auto loan directly with a bank, credit union, or other lender (not through the dealer), that entity is your lender. If you got your financing through the dealer, or your lender transfers servicing rights to a third party, you can generally expect that you will receive a welcome letter from your lender or servicer giving you information about your loan. The letter should include contact information and information about how and when you make payments. Make sure you keep and pay attention to your paperwork, as it can tell you:
  • Who your lender or servicer is
  • Where tao send your payments
  • What counts as an "on time" payment (usually when the lender receives it, not when you mail it) and whether there is a grace period
  • The amount of any late fees
  • Whether there is a penalty if you pay off the loan early (prepayment penalty)
  • Who to contact if you are having difficulty making payments


Can the dealer increase the interest rate after I drive the vehicle home? [117]

  • Some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This practice is sometimes called "spot delivery." In some cases after you drive away with the vehicle but before the sale is finalized, the dealership will later tell you that they couldn't make the loan at the agreed-upon terms. They then may ask you to bring back the vehicle and renegotiate the loan for a higher interest rate, a longer term, a larger down payment, or a combination of those terms. If this happens and you don't agree to a second deal, the dealer will have to unwind the sale and give you back your trade-in and down payment. This is sometimes called a "yo-yo sale" and you may be entitled to legal protections in some situations.
  • Before you drive off with your new vehicle, make sure:
  • you reviewed the contract and disclosures before agreeing to the loan and auto sale to make sure you understand the terms of your deal;
  • you have a signed copy of all documents that both you and the dealer have signed and that all blanks are filled in;
  • the financing and the loan rate is final before you take the vehicle off the dealer's lot.
  • If the contract did not contain a clear statement that the deal was not final or that the sale was conditional on the dealer being able to find someone to buy your loan within a short duration of time, and if you already signed all of the documents before you left with the vehicle, you may have a right to keep it and make the payments as agreed.
  • If you are asked to return to the dealer to discuss your financing and it was not disclosed to you that the deal was not yet final, you may submit a complaint to the FTC [118] or in the case of a Buy Here Pay Here dealer, with the CFPB [119] or by calling them toll-free at 1-855-411-CFPB (2372). You can also tell them about your experience without submitting a formal complaint.
  • You can also submit a complaint with your State AG [120]. If you're in the military, you should report this to your installation JAG immediately. To [121] . If you need to legal assistance, this list of lawyer resources from the American Bar Association. You can find legal help from your local legal aid [122]


My auto loan paperwork said the extended warranty was optional but I was told that I was required to purchase an extended warranty to get the promotional interest rate. Do I have to purchase it? [123]

  • If the paperwork says the warranty is optional, the dealer can't require you to purchase it.
  • If you believe that your dealer has misrepresented the terms of an agreement, you may file a complaint with your State AG [124]. If you're in the military, you should report this to your installation JAG immediately. To [125] . If you need to legal assistance, this list of lawyer resources from the American Bar Association. You can find legal help from your local legal aid [126]. Also, you may want to consider contacting a private attorney for assistance.


What is included in the monthly auto loan payment? [127]

  • The monthly payment includes all charges agreed to in the contract. This will include the principal and the interest on your loan. Your monthly payment may also include credit insurance charges or other optional add-ons that you agreed to finance as part of your auto loan. Late fees may also be added if allowed in your contract and you have paid late.
  • If your monthly payment is higher than your loan agreement calls for, contact your lender or the servicer identified on your statement and ask for an explanation- there might be a billing error.


Am I required to purchase credit insurance from a lender or dealer to get an auto loan? [128]

  • No, generally you cannot be required to buy credit insurance. Lenders cannot deny you credit if you refuse to buy optional credit insurance. If you feel pressured to buy credit insurance, walk away and consider looking for a different dealer or lender.
  • If a lender or dealer denies you credit because you refuse to buy any optional products like credit insurance you may want to submit a complaint with the CFPB.
  • Credit insurance is usually expensive and you may be able to accomplish the same goal by obtaining other insurance coverage, such as life insurance. Other coverage may be cheaper and provide you with more flexibility by allowing you to pay off more than just the amount of your auto loan. Before you sign any loan papers, ask the lender whether the loan includes any charges for credit insurance.


Will an auto loan help me rebuild my credit? [129]

  • If you make timely payments, an auto loan will help you build your credit if the lender reports your payments to one or more of the three major credit bureaus (Experian, Equifax, and TransUnion).
  • Some auto lenders, often called "Buy Here Pay Here" lenders, may not report your loan at all. Some of these dealers may market themselves as a way to rebuild your credit, but you don't get this benefit if they do not report your loan to a credit reporting bureau. If you are considering taking out a loan with a Buy Here Pay Here dealer, make sure you get a promise in writing that they will report your on-time payments.
  • Remember that taking out an auto loan will only help rebuild your credit if you make your payments on time.


I owe more on my current loan than my current vehicle is worth. What do I need to know if I buy a new vehicle? [130]

  • If you are considering rolling the balance of the old auto loan into your new auto loan, make sure you understand how this will affect the total cost of your new loan. Carefully look at the total cost of the new loan including the amount borrowed, the annual percentage rate (APR), the interest rate, the loan term (in months), and the monthly payment - before you agree to anything. If you don't roll the amount you still owe on your old vehicle into the new loan, and keep your current vehicle while buying a new one, then you will have two loans and two monthly payments to make. Either way, you may want to consider whether it makes sense to go through with the transaction and purchase the next vehicle if you still owe money on your trade-in.
  • If you owe more than your current vehicle is worth - sometimes referred to as "underwater" - you should consider whether you can afford a new vehicle.
  • To find out if you have negative equity, you should look up the approximate value of your current vehicle using websites such as the Consumer Reports, Edmunds, Kelley Blue Book, NADA Guides, and online classifieds. You may also find these and other resources at your local library. Look up the "private sale" value, because that's what you can get if you sell your vehicle to an individual. Look up "Trade In to Dealer" if you want to see a range of prices for similar vehicles. Then call your lender to find out how much you still owe on your loan.
  • A dealer may offer to "roll in" the balance of your old loan into a loan for a new vehicle. This is called a "negative trade-in," because the trade-in adds to the cost of the new loan, rather than reducing it. This might make the new loan unaffordable. Be very careful to make sure you understand the total cost of the new loan and the monthly payments - and the loan term (in months) - before you agree to anything.
  • TIP :Be sure to talk to your dealer and your lender about any outstanding loans or financing on your trade-in. Make sure that your dealer or lender arranges to pay off your current loan if you trade in a vehicle with a different dealer.


How does a lender decide what interest rate to offer me on an auto loan? [131]

  • An auto lender will typically consider several main factors:
  • Your credit score and credit history
  • Your income and debts
  • The amount of the loan
  • The length of time you'll be paying back the loan, called the "loan term" or "term of the loan"
  • The amount of your down payment as a percentage of the value of the vehicle
  • The type of vehicle and whether you are purchasing a new or used vehicle


What effect will shopping for an auto loan have on my credit? [132]

  • Shopping for the best deal on an auto loan will generally have little to no impact on your credit score(s). The benefit of shopping will far outweigh any impact on your credit. In some cases, applying for multiple loans over a long period of time can lower your credit score(s). Generally any requests or "inquiries" by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry, depending on the credit scoring model used. You can minimize any negative impact to your credit by doing all of your shopping in a short amount of time. You could save hundreds or even thousands of dollars by shopping for the best rate and terms on a loan.
  • For example, let's say you are looking around for an auto loan and you authorize five lenders to check your credit score(s) within a 14 day time span. All those inquiries should count as one inquiry. If you shop for a mortgage loan at the same time you are shopping for an auto loan, the shopping you do for those two loans should count as two separate inquiries.

What should I do if I think an auto dealer or lender is violating the law? [133]

  • Keep all the documents, voicemails, and records of your interactions with the dealer or lender. If your problem is with a lender or a Buy Here Pay Here dealer, you may file a complaint with the CFPB and your state attorney general. If your problem is with a traditional dealer, you may file a complaint with the FTC or state AG. Also, you may want to consider contacting a private attorney for assistance.


Glossary[edit]

actual cash value (ACV)[edit]

the value of the car according to independent sources such as the National Automobile Dealers Association or Kelley Blue Book. This value is important for some valuations, like for insurance.

base price[edit]

the price of the vehicle without options. The manufacturer's base price excludes charges for optional equipment (like a sunroof) and excludes mandatory charges for taxes, title, and registration. The base price also excludes the cost of optional add-ons such as credit insurance, service contracts, window etching, and rustproofing.

bank financing[edit]

when you go directly to a bank, credit union, or other lender, and apply for a loan (instead of getting a loan through the dealer). These lenders can "preapprove" you. If they are willing to make an auto loan to you, the lender will quote you an interest rate, loan term (number of months), and maximum loan amount based on factors such as your credit score(s), the terms of the transaction, and the type of vehicle. This lender will then give you a quote or a conditional commitment letter before you go to the dealership. The bank, credit union or other lender offers certain terms, and those terms are negotiable.

"buy here, pay here"[edit]

a "no credit check" or "buy here, pay here" auto loan is offered by dealerships that typically finance auto loans "in-house" to borrowers with no credit or poor credit. You may see signs like "no credit - no problem" or "military E-1 and up." The interest rate on loans from these dealerships can be much higher than loans from a bank, credit union, or other lender. Normally, a bank, credit union, or other lender will limit the amount it will lend for the purchase of a vehicle based on the vehicle's value. Those lenders will not loan more than the value because the vehicle in question simply isn't worth it. But when a dealer acts as its own "bank," it may not set such limits. So you may end up paying thousands of dollars more than the actual value. In other words, with "buy here, pay here," there is a bigger risk that you will borrow to pay more than the vehicle is worth. Another feature of this type of dealership is that your monthly payment is to the dealership. Some Buy Here Pay Here Dealerships, and some other lenders that lend to people with no credit or poor credit put devices in their vehicles that help them repossess or disable the vehicle if you miss a payment.

buy rate[edit]

the interest rate that a potential lender quotes to your dealer when you apply for dealer-arranged financing. Your dealer may offer you an interest rate that is higher than the buy rate. The rate the dealer offers you is called the "contract rate." Sometimes the lender pays the dealer a fee for arranging the financing that is based on the difference between these two rates. Dealers may have discretion to charge you more than the buy rate, so you may be able to negotiate that interest rate. o Ask the dealer if you qualify for a loan with better terms. In general, dealers and lenders are not required to offer the best rates available. This could save you hundreds or thousands of dollars over the life of the loan. o The dealer may offer you a higher interest rate than you can get directly from a bank, credit union, or other lender.

credit Insurance[edit]

optional insurance that make your auto payments to your lender in certain situations, such as if you die or become disabled. When you are applying for your auto loan, you may be asked if you want to buy credit insurance. There are four main types of credit insurance: " Credit life insurance, which pays off all or some of your loan if you die " Credit disability insurance, also known as accident and health insurance, which makes payments on the loan if you become ill or injured and can't work " Involuntary unemployment insurance, also known as involuntary loss of income insurance, which makes your loan payments if you lose your job due to no fault of your own, such as a layoff " Credit property insurance, which protects personal property used to secure the loan - in the case of an auto loan this would be your car - if it is destroyed by events like theft, accident, or natural disasters If a lender tells you that you'll only get the loan if you buy the optional credit insurance, you can submit a complaint to your state attorney general, your state insurance commissioner, or the Federal Trade Commission. If you decide you need insurance, there may be cheaper ways for you to obtain coverage than to buy credit insurance and add it to your auto loan. For example, life insurance may be less expensive than credit life insurance and allow your family to pay off other expenses in addition to your auto loan.

dealer-arranged financing[edit]

the dealer collects information from you and forwards that information to one or more prospective auto lenders. If the lender(s) chooses to finance your loan, they may authorize or quote an interest rate to the dealer to finance the loan, referred to as the "buy rate." The interest rate that you negotiate with the dealer may be higher than the "buy rate" because it may include an amount that compensates the dealer for handling the financing. Dealers may have discretion to charge you more than the buy rate they receive from a lender, so you may be able to negotiate the interest rate the dealer quotes to you.

debt cancellation or debt suspension products[edit]

Some auto dealers as well as banks and credit unions offer "debt cancellation" and "debt suspension" products or insurance under various names. These products are similar to credit insurance in terms of their function, but fees and other features may be different. In general, debt cancellation promises to eliminate the debt if you die or cancels the monthly payment if you become disabled, unemployed, or suffer some other specified hardship. You have to meet the qualifications and avoid the exclusions. Debt suspension is different. It temporarily postpones all or part of your monthly payment while you are facing a specified hardship. You are still expected to make the suspended payments in the future.

deficiency balance[edit]

if your vehicle is repossessed and sold, you may be responsible for paying the difference between the amount left on your loan (plus repossession fees) and the sale price. This is known as a "deficiency balance". For example, if you owe $10,000 on the vehicle and your creditor sells it in a commercially reasonable manner and gets $7,500, then the deficiency is $2,500 plus any other fees you owe. If you don't pay the deficiency, the lender may hire a debt collector to attempt to collect the debt. The lender may also file a lawsuit in court against you to collect the deficiency. If the lender obtains a judgment from the court, the lender can garnish your wages and take other steps to collect the judgment.

finance and insurance (F&I) department[edit]

the part of the auto dealership that markets loans and optional add-ons to customers after they have agreed to buy a vehicle at the dealership. At the F&I department, you may be asked if you want to buy optional add-ons like an extended warranty, auto service contract, credit insurance, or guaranteed asset protection (GAP) insurance.

force-placed insurance[edit]

in order to get a loan to buy a vehicle, you must have insurance to cover the vehicle itself. If you fail to obtain insurance or you let your insurance lapse, the contract usually gives the lender the right to get insurance to cover the vehicle. This insurance is called "force-placed insurance." This insurance protects only the lender, not you, but the lender will charge you for the insurance. Force-placed insurance is usually a lot more expensive than what you can obtain by finding an insurance policy yourself. If you have a complaint or a concern about this product, you can also contact your state insurance department or commissioner.

guaranteed auto protection (GAP) insurance[edit]

GAP insurance may be offered to you when you buy a vehicle. GAP insurance covers the difference (or gap) between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged, or totaled. You don't have to buy this insurance, but if you decide you want it, shop around. Lenders may set varying prices for this product. " It is highly unusual for a lender to require that you buy GAP insurance. If you are told that you are required to purchase a product such as GAP insurance, ask to see where your sales contract says it is required. If the contract does not explicitly state that it's required, then you can't be required you purchase it. " If you're told you must purchase a GAP plan to qualify for financing, contact the lender yourself to find out if that is true. If it is true, the cost of the GAP insurance must be included in the finance charge and reflected in the disclosed annual percentage rate (APR). GAP insurance can be excluded from the finance charge and APR if it is optional. If you have a complaint or a concern about this insurance product, you can contact your state insurance department or commissioner.

loan-to-value ratio (LTV)[edit]

the total dollar value of your loan divided by the actual cash value (ACV) of your vehicle. It is usually expressed as a percentage. Your down payment reduces the loan to value ratio of your loan. Your loan terms may be affected by the loan-to-value ratio, because the vehicle is the collateral for the loan, which means that if you default on your loan, the lender can take the vehicle. The lender may seek a down payment to reduce the size of the loan and make it less likely that the amount you owe on the loan will be more than the vehicle is worth.

manufacturer incentives[edit]

special deals, like 0% financing or cash rebates that you may have seen advertised for new vehicles. Often, they are offered only for certain models. Manufacturers offer these deals many times when they are having campaigns to sell certain models, or because they have a large inventory that they want to sell more quickly. Sometimes promotional interest rates are limited to people with high credit scores or to loans of a shorter duration.

manufacturer suggested retail price (MSRP)[edit]

the price that the automaker - the manufacturer - suggests that the dealer ask for the vehicle. It does not have to be the actual price that you pay. Many consumers negotiate to purchase the vehicle for a price below the MSRP.

negative trade-in[edit]

a dealer may offer to "roll in" the balance of your old loan into a loan for a new vehicle. This is called a "negative trade-in," because the trade-in adds to the cost of the new loan, rather than reducing it. This might make the new loan unaffordable. Be very careful to make sure you understand the total cost of the new loan and the monthly payments - and the loan term (in months) - before you agree to anything.

"no credit check" auto loan[edit]

see "buy here, pay here"

precomputed interest[edit]

one method, like simple interest, to calculate your interest due. The precomputed interest method always uses the original payment schedule to figure interest, even if you make payments early. If you have a contract with precomputed interest and plan to pre-pay your loan early in full or make larger payments in advance of your regularly scheduled amount, you will not get the same reduction in the interest charges that you would if your contract had a simple interest rate. If you pay on time for each payment over your loan term, there is little difference between simple and precomputed interest. Precomputed interest is generally not used by banks and credit unions. Some lenders may offer precomputed interest and others may not. Shop around and compare multiple offers.

retail installment sales contract or agreement[edit]

a retail installment sale is a transaction between you and the dealer to purchase a vehicle where you agree to pay the dealer over time, paying both the value of the vehicle plus interest. A dealer could sell the retail installment sales contract to a lender or other party. A loan is a transaction between you and a bank or other lender for money, where you use the money to purchase a vehicle and agree to repay the loan balance plus interest. A retail installment sales contract agreement is slightly different from a loan. Both are ways for you to obtain a vehicle by agreeing to make payments over time. In both, you are generally bound to the agreement after signing. With a retail installment sales contract, you may have additional rights under your state's law (for example, the ability to stop making payments to the dealer) if there is a defect in your vehicle.

risk-based pricing[edit]

occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans. This means, for example, that lenders will generally offer a higher interest rate to you if they view you as a higher risk borrower - say, because you recently declared bankruptcy, lost a job, or are several payments behind on a mortgage. For the same exact loan, lenders will generally offer a lower interest rate if they view you as a lower risk - say, because you have a good credit score and are employed.

risk-based-pricing notice[edit]

each lender uses its own process to determine the risk that you will default on a loan, but most use your credit score, employment status, income, and other outstanding debts, among other factors. If a lender relied on a credit report in making a lending decision about you, you should get a Risk-Based Pricing notice if you receive less favorable terms than other borrowers based in any part on your credit report. This notice includes information about how to get your free annual credit report, your credit score, the score range, and the negative factors affecting the score. Lenders may NOT use certain legally prohibited factors to decide whether to give you a loan or how much to charge you, such as your race, gender or age.

simple interest[edit]

one method, like precomputed interest, to calculate your interest due. The simple interest method uses the amount or actual balance outstanding on the day your payment is due. If you pay more than your monthly payment, this amount should get smaller as you pay down your loan. . If you think there's a possibility you may want to pre-pay your loan in full or pay more than what you owe to pay your loan off earlier, a loan with simple interest will probably make more financial sense than precomputed interest for you.

starter interrupt device (SID)[edit]

a device that allows a lender or lessor to remotely deactivate a vehicle's ignition system if a borrower/lessee misses payments or defaults. The shut-down can be temporary, until a payment is made, or it can be done to make repossession easier. The rules on SIDs vary from state to state so ask your lender before signing the contract if your vehicle is equipped with a SID. If it is, you should ask how this process will work - for example, will you get any warning before the vehicle is shut down? Is there a way for the vehicle to be restarted in case of an emergency?

spot delivery[edit]

some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This practice is sometimes called "spot delivery." In some cases after you drive away with the vehicle but before the sale is finalized, the dealership will later tell you that they couldn't make the loan at the agreed-upon terms. They then may ask you to bring back the vehicle and renegotiate the loan for a higher interest rate, a longer term, a larger down payment, or a combination of those terms.

vendor's single interest (VSI) insurance[edit]

VSI insurance protects the lender, but not you, in the event that the vehicle is damaged or destroyed. The cost of the insurance may be passed on to you in the overall cost of your loan or may appear as a separate charge.

yo-yo sale[edit]

some dealers will allow the customer to take possession of the new vehicle before the loan is approved by the lender. This practice is sometimes called "spot delivery." In some cases after you drive away with the vehicle but before the sale is finalized, the dealership will later tell you that they couldn't make the loan at the agreed-upon terms. They then may ask you to bring back the vehicle and renegotiate the loan for a higher interest rate, a longer term, a larger down payment, or a combination of those terms. If this happens and you don't agree to a second deal, the dealer will have to unwind the sale and give you back your trade-in and down payment. This is sometimes called a "yo-yo sale" and you may be entitled to legal protections in some situations.